Putin’s Energy Diplomacy Is Getting the Cold Shoulder
Putin’s pipe dreams to cement a flurry of energy deals with Asia and Europe are in disarray.
Russian President Vladimir Putin has been trying his own pivot to Asia, hoping that his country’s vast natural gas holdings could cement a new relationship with China while making it easier to bypass his quarrelsome neighbors in Europe. Unfortunately for the Russian strongman, things aren’t going so well.
Over the past year alone, Putin has inked a massive, $400 billion natural gas deal and a strategic partnership with Beijing. Russia also hoped to build a second Siberian pipeline to China that could give Moscow the ability to play off European energy customers against those in Asia. Putin also doubled down on Europe: When European Union officials blocked one $40 billion gas pipeline across the Black Sea, he simply dreamed up a new one through Turkey. That could be his key to finally bypassing troublesome Ukraine as a transit country for natural gas, tightening control over energy exports to Europe, and showering largesse on friends and allies. Case in point: When Greece came cap in hand to Moscow this summer, Putin promised to finance another $2 billion pipeline spur to tie into the Turkey project and cement ties with Greece’s left-wing government.
But from Ankara to the Altai Mountains, Putin’s pipe dreams appear to be in disarray. China, realizing it doesn’t need as much energy as it thought, has gotten cold feet on the second gas deal. Turkey and Russia still can’t reach an agreement on the so-called “Turkish Stream” project and have put off further talks until the fall. Other ambitious Russian projects, from liquefied natural gas terminals in the Far East to a gas line unifying Korea, are going nowhere, even as Russia keeps proposing more and more big energy projects. And in a telling about-face, Russia has now abruptly decided that it cannot simply bypass Ukraine and must keep pumping gas to Europe across the territory of its wary neighbor for decades to come.
“Putin’s energy strategy is in shambles. Nothing seems to work: No ‘Streams,’ no bypasses, no China,” said Ilian Vassilev, a former Bulgarian ambassador in Russia and now an energy consultant.
But even as Russian projects move further and further away from apparent completion, more and more are announced. The latest is a planned expansion of the so-called Nord Stream pipeline that fuels Europe via the Baltic Sea. But that pipeline wouldn’t be necessary if Ukraine is still shipping gas, or if the Turkish project ever happens.
“You get the feeling that the Russians have lost the plot a little bit, throwing up all these projects, some of which are of dubious economic value,” said Ed Chow, an energy expert at the Center for Strategic and International Studies who has recently written about Russia’s proliferating pipelines. “Is it because they want to give the appearance of being in control when things are actually spinning out of control?”
There are many reasons why Russia’s energy plans seem to be stumbling, but fundamentally it is because the country’s grandiose visions are colliding with reality. Global energy markets have been transformed in just the past year: Demand for oil and natural gas is weak, and prices have collapsed. A huge buyer’s market is bad news for a country reliant on energy exports for half its budget; the IMF said this week that cheap oil and sanctions will shrink Russia’s economy by 3.4 percent this year.
The economic straitjacket brought about by Western sanctions on many big Russian firms, especially in the energy sector, chokes off financing and makes hugely ambitious projects even tougher to pull off, especially in the unrealistically short time frames Russia keeps proposing. And Russia has to grapple with all those challenges while juggling not just bottom-line economics, like any energy-producing country, but also Putin’s ever-shifting strategic calculus.
And there are other albatrosses for Russian energy firms: Contractors close to the Kremlin can make a killing providing equipment for projects, even if they never come to fruition, said Mikhail Korchemkin, the managing director of East European Gas Analysis, an energy consultancy. He noted Russian press reports that estimate Gazprom spent about $40 billion on unnecessary projects.
The changing energy markets have hit Russia hard. New sources of supply of natural gas, from the United States and other places, have been eroding Moscow’s market dominance. The U.S. natural gas boom has weakened Russia’s hold on the European market even though the United States has yet to export a molecule there, simply by adding more gas to a well-supplied market.
U.S. officials, including President Barack Obama, Secretary of State John Kerry, and many Republican lawmakers, have sought to use prospective U.S. gas exports to Europe as a way to weaken Russia’s hold. The United States also seeks to bolster Europe’s own ability to get energy from places other than Russia. State Department officials declined to comment for this story.
Other new energy suppliers, such as Australia, also have set their sights on the Asian market, which Russia was slow to tackle seriously, giving Russia’s prospective customers a lot more bargaining power.
Due to those market changes, especially the ripple effects of the U.S. gas boom, Vassilev, the former ambassador, said he expects Russian gas exports to become more like plain old oil exports, which aren’t used as a geopolitical weapon because oil is such a large, liquid market.
“Russian gas will be traded like Russian oil and very much deprived of its elite strategic foreign-policy status,” he said.
The shift in Russia’s prospects in China alone over the past year has been chilling. When, after a decade of haggling, Moscow and Beijing finally inked their mammoth gas deal in May 2014, the outlook for Chinese energy demand was still robust. The economy was growing fast, and Beijing stressed the need to find cleaner sources of fuel.
But a year later, the Chinese economy has slammed on the brakes. Growth has slipped, and more importantly the rebalancing of the Chinese economy away from energy-guzzling heavy industry to leaner service sectors has walloped the demand outlook there. Energy consumption is growing at the lowest levels of the century so far. If China was already driving a hard bargain on price with Russia before the slowdown, it is now in a position to simply walk away from unnecessary projects. Late last month, Chinese energy firms quietly suspended the second Siberian gas project, known as the Altai pipeline or Power of Siberia-2.
The tough market environment is also muddying the outlook for Turkish Stream. When Putin announced the pipeline project last December, he hailed a “strategic partnership” with Turkey. Yet the two sides still haven’t reached an agreement on something as basic as the price that Turkey will pay for Russian gas. Turkish and Russian officials have spent the summer in a duel of declarations over the actual status of the project.
What’s more, while the two sides may eventually build a limited pipeline to supply the Turkish domestic market, the notion of a huge Russian route to fuel Europe via Turkey is looking questionable. The same legal and regulatory problems that doomed Russia’s original pipeline plan (known as “South Stream”) still hold true today; unless and until Russian firms comply with European Union competition law, new Russian pipelines can’t land in European territory. That dims any idea of a Russian-financed pipeline inside Greece to link Europe to Turkey.
Moreover, Russia’s natural gas behemoth, Gazprom, doesn’t seem to have the financial muscle to build all these huge projects on its own. Thanks to weak demand in Europe, the company’s main market, plus all the strife in Ukraine, Gazprom’s profits fell last year by almost 90 percent. Whether it’s Turkish Stream, or the Greek spur, or the Altai route from western Siberia into the far provinces of China, those energy projects require plenty of upfront spending with no immediate return on investment. That is where Putin’s strategic visions keep colliding with marketplace realities.
“You are transporting the same gas in a lot of cases, but across a new pipe that has to be built over longer distances to market,” Chow said. “Even though it may be strategically desirable, it doesn’t make you money, it costs you money.”
That’s one reason Russia has suddenly backed away from its stated goal of ending natural gas transits across Ukraine by 2019. For months, and as recently as early June, Russian leaders and energy officials warned Europe it would have to find another way to get Russian gas, because Moscow doesn’t want to ship it through Kiev anymore.
Then Russia’s tune abruptly changed, after Putin apparently realized that there is no way the country can plan, finance, and physically build thousands of miles of pipelines needed to supplant the network already in Ukraine. Gazprom boss Alexey Miller said in late June he would reopen talks with Ukraine over future gas transit after the current contract expires.
“I can tell you that we have a direct order from the president of the Russian Federation, Vladimir Vladimirovich Putin,” Miller said, according to Reuters.
Photo credit: ALEXANDER ZEMLIANICHENKO/AFP/Getty